Welcome to 2024.  The courts wrapped up last year with both substantive and procedural issues.

Delegation through Adoption of the AAA Rules; Unsophisticated Parties

Courts for a number of years have held that the incorporation of the AAA or JAMS rules delegate many gateway issues, such as arbitrability, to the arbitrator.  Many of those cases, however, arise in the context of sophisticated business parties.  Some courts have questioned whether the rule should apply to unsophisticated, e.g. consumer, parties, who might not understand the full impact of a reference to an institution’s rules, see, e.g. Brennan v. Opus Bank, 796 F. 3d 1125, 1131 (9^th Cir. 2015).  In Ahern v. Fiserv, Inc., 2023 U.S. Dist. LEXIS 231048 (C.D. Cal. December 8, 2023), Judge Hsu applies the doctrine to an employment dispute. He acknowledges a split among the District Courts of the Circuit, comparing Eiess v. USAA Federal Savings Bank, 404 F. Supp. 3d 1240 (N.D. Cal. 2019)(incorporation did not apply to unsophisticated party), with Gerlach v. Tickmark, Inc., 2021 W.L. 3191692 (N.D. Cal. July 28, 2021)(applied incorporation to “non-sophisticated parties”).  However, he finds that the more consistent rule is “that the existence of the AAA is an express delegation of arbitrability without factoring in the sophistication of the parties.”  In a footnote, he opines that, even if he were to adopt plaintiff’s position that the court must consider the sophistication of the parties, Ms. Ahern, who had twenty-five years of experience in the banking industry, including service as a CFO, would have “knowledge of the mechanics of a contract and how to raise an issue with the [subject] Agreement, if necessary.” Judge Hsu, then, rejects Plaintiff’s unconscionability argument on both procedural and substantive grounds and compels arbitration.

The case is an important read for anyone challenging or defending a rule-based delegation provision in a contract involving either lower-level employees or consumers (which seem to make up the majority of run-of-the-mill arbitrability cases); in addition to its own reasoning, the opinion provides a starting point for finding cases on both sides of the issue.

Litigation Waiver

Derriman v. Mizzen and Main, LLC., 2023 U.S. Dist. LEXIS 230653 (M.D. Tenn. December 29, 2023), addresses the standard for determining litigation waiver in the wake of Morgan v. Sundance, Inc., 596 U.S. 411 (2022).  In Morgan, SCOTUS invalidated the Eleventh Circuit’s requirement that a party seeking to invalidate an arbitration clause on the basis of litigation waiver demonstrate prejudice, where no such requirement existed under applicable law for establishing the waiver of any other contractual right. Judge Honeywell addresses the extent to which the Morgan doctrine extends to elements of waiver beyond prejudice.  The Circuit’s waiver test requires the party alleging litigation waiver prove that the party seeking arbitration “acted inconsistently with the arbitration right by ‘substantially participat[ing]’ in the litigation.” (Emphasis added; internal citation omitted; bracket in opinion). However, Judge Honeywell holds, “the Eleventh Circuit does not apply a ‘substantial participation’ standard for other contractual rights that may be waived by participation in litigation.” (citation omitted). “Under Morgan,” she opines, “such a heightened standard for considering waiver is impermissible – as courts may only place arbitration agreements upon the same footing as other contracts. Thus, waiver of arbitration rights is now evaluated under the same state-law standards governing other contract waiver issues.” (internal citation omitted).  Judge Honeywell ultimately determines that, under applicable state law, Defendant did not engage in action which would result in waiver.  However, to the extent that that Judge Honeywell is right in holding that “substantial participation” – and, by extension, any element in an arbitration waiver situation which deviates from applicable state law for waiver generally – is invalidated by Morgan, this is an important case to keep in your notebook. If you are involved in a litigation waiver situation, always check state law to see if you are better off with those standards than with whatever is imposed under Circuit court pre-Morgan principles; if so, invoke Morgan to argue for the invalidation of the federal standard.

Rule 12(b)(6) Dismissal v. Rule 56  Summary Judgment Standard

Especially for those in the Third Circuit, Vinella v. United Insurance Co., 2023 U.S. Dist. LEXIS 229433 (D.N.J. December 27, 2023), and Castelli v. American Red Cross, 2023 U.S. Dist. LEXIS 229426 (D.N.J. December 27, 2023), both decided by Judge Salas, are worth reading.  In each, the court considers whether to apply the standard under Fed. R. Civ. P. Rule 12(b)(6) or the summary judgment principles of Rule 56 in determining a motion to compel arbitration.  The difference resolves the question of whether the court may look outside the four corners of the complaint and, rather than relying upon the pleadings as it must do under Rule 12(b)(6), determine whether the parties have a genuine issue as to one of the elements related to arbitrability.  The Court opines that the Third Circuit, in Guidotti v. Legal Helpers Debt Resolution, LLC, 716 F. 3d 764 (3^rd Cir. 2013), held that, in determining whether a valid agreement to arbitrate exists, the court should only apply Rule 12(b)(6) when an agreement to arbitrate is explicitly mentioned on the face of the complaint and attached as an exhibit or “is integral to or explicitly relied upon in the complaint or has been incorporated by reference. . . .”  Applying that standard, Judge Salas holds that, in both these cases, Rule 56 applies, and she denies the motion to compel, without prejudice, pending limited discovery on the issue of arbitrability.

I hope you did not come back from the holidays to a full desk, overstuffed calendar, and whole lot of things that opposing counsel threw your way on the way out the door before the “quite” week between Christmas and New Year.

David A. Reif, FCIArb
ReifADR
Dreif@Reifadr.com
ReifADR.com